Knowledge Base

In a Perfect World the Developer's Net Worth Should Be as Large as the Construction Loan

Commercial construction lenders - over 500 of them - await your application for a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 400 banks and 100 hard money construction lenders simply click here.

Historically commercial construction lenders have required that a developer's net worth be at least as large as the construction loan that he is requesting. In a perfect world, if the developer is applying for a $5 million construction loan, he should have a net worth of at least $5 million. Fortunately commercial construction money is so plentiful today that many construction lenders are relaxing this requirement.

The test that commercial construction lenders apply is the Net-Worth-to-Loan-Size Ratio. Simply divide the net worth of the developer by the loan size. This result should be greater than 1.0. During recessions, banks will often require this ratio to be as high as 1.5.

What if there are several members of the development company with a decent net worth, but none of them alone satisfies this test? Answer: You can combine the net worth of the developers.

Commercial construction money is immensely plentiful today, so lenders are relaxing the Net-Worth-to-Loan-Size Ratio. How low will they go? Nothing is written in stone, but some commercial construction lenders may consider a Net-Worth-to-Loan-Size Ratio as low as 0.75.

But if the developer's net worth is not even 75% of the commercial construction loan that he is requesting, then the loan request is seriously flawed.

Commercial construction lenders - over 500 of them - await your application for a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 400 banks and 100 hard money construction lenders simply click here.